Retailers participating in this year’s study plan to spend 8 percent more in 2008 than in 2007 for their total IT budgets, which include the line items of operational IT costs, IT depreciation expense and total labor costs. This translates into plans to spend approximately 1.62 percent of revenue on IT, up from the 1.5 percent that retailers indicated they spent in 2007.

Growth in IT capital costs are expected to jump in 2008, with an average increase of 14 percent, up significantly from the 3 percent increase reported for 2007. Retailers expect to slow investments in point-of-sale (POS) software as a result of upgrades made in the last five years. Spending on other store hardware such as kiosks, digital signage and hand-held devices will reinforce cross-channel merchandising efforts and improve the shopper in-store experience.

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Continuing the shift toward packaged applications, retailers increased their capital budgets for software licenses by 76 percent over 2007 spending levels. Retailers recognize that although they may have completed important improvements to core retail systems, they now need to shift their attention and software budgets to new areas in planning, e-commerce, and cross-channel merchandise management.

Depreciation expenses are growing 7 percent because of the sustained high level of capital expenditures that began with double-digit increases in 2004 and 2005.

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Packaged software licenses and maintenance drive operational cost increases
The anticipated increase of 49 percent for expensed software licenses and 19 percent for software infrastructure outlays are driving an 11 percent increase in operational budgets in 2008.

As retailers shift from home-grown software to packaged best-of-breed software, with the infrastructure to tie the pieces together more effectively, increased spending in these areas offsets reduced spending in POS hardware leases and maintenance.

Planned increases of 11 percent for headquarters and software maintenance fees reflect the ongoing care and feeding of systems, including many of the applications retailers have purchased over the last five years for which they are now paying annual maintenance.

Anticipated operational expenses for telecommunications and networking are increasing in parallel with capital expenditure increases in these areas. This is occurring as retailers make progress on plans to centrally manage an ever-increasing number of store applications, a trend we first noted three years ago in “The 21st Century Store Tech Trends Survey: Targeted Investments to Enhance Customer Interactions.”

Retailers are shifting away from dial-up and frame-relay connectivity toward T1 lines and DSL as the economics of the newer technologies and competition among providers make them more affordable.

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Retailers invest in internal staff and pause increases in outside labor spending
Retailers in our study intend to increase their IT salary budgets by 9 percent, a substantially larger increase than the 4 percent in 2007. IT staff with skills in e-commerce, business intelligence and wireless technology as applied in the retail industry are limited in number and come at a premium.

In addition, as retailers look to close execution gaps at the core of their businesses -- between headquarters’ plans and store-level execution -- the use of RFID and other wireless technologies to guide and track performance will add to the search for skills (see “Bridging the Merchandising and Store Operations Divide,” for more).

Indeed, the demand for some of these hard-to-find skill sets has led retailers to increase their IT training budgets by 20 percent in 2008. Companies also increased the amount of training, with 17 percent setting aside six to 10 days annually for training activities.

After two years of large increases in budgets for expensed outside labor and consultants (non-employee, offshore and onshore), retailers now expect to flatten and even reduce expenditures by an average of 3 percent in 2008, as service providers lower rates on certain kinds of IT work and rates in general become more competitive.

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Retailers plan to increase the percentage of outsourced IT work in data center operations by 21 percent in 2008. This is welcome news to the many services firms that offer outsourcing in this area and have recently turned their attention to the retail industry as business from other services sectors has dropped off.

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